Businomics Blog

Economic Outlook: Better than We Expected

Today's GDP report gives us reason to feel more comfortable, but there is a little discomfort in the details.

The economy had slowed last winter.  Now we see that several key factors in the slowdown have recovered, like inventories,

capital spending,

and exports.

Our  biggest fear of late is that the subprime crisis will spill over into the consumer sector, but that has not happened.

Here's the disquieting note.  Real GDP growth is approximately nominal GDP growth (that's the increase in actual dollars spent) minus the inflation rate.  Last quarter's inflation rate came in very, very low, meaning that inflation subtracted very little from nominal growth.  Although that's the actual data, it may not be indicative to what's really going on now, especially with oil prices up and the dollar falling.

Here's my take: the headline GDP figure of 3.9 percent growth is "kind of" actually 2.4 percent growth.  That's not bad, but it's a little below normal.  We might get a little less next quarter.

Business planning implications:  Don't go hunkering down because of the bad headlines.  Consumers, businesses and governments are still willing and able to spend money.  Although there's a risk of a downturn, the odds favor economic conditions between slightly-sub-par to par.

Federal Reserver Policy in the Subprime Crisis

The Wall Street Journal's Greg Ip has a great article today, "Bernanke, in First Crisis, Rewrites Fed Playbook."  (Subscription required, and well worth the price.)  The story is written in a narrative that reads almost like a thriller.  Almost, because it is Federal Reserve policy, after all.  Ip explains Bernanke's economic views, and how he relied on a number of savvy advisers for up-to-date market information.

My own fear about Bernanke, when he was first appointed, was that he lacked the gut feel for economic fluctuations that one gets from being an economist at a bank, Wall Street firm, or macroeconomic consulting firm.  However, Bernanke isn't showing any weakness in that dimension.

We still have to worry about his use of "The Greenspan Put."   This is the idea that if big institutions make stupid mistakes, the Fed will cut interest rates to prevent a crisis, effectively bailing the institutions out of their problems.  (A put is an option to sell an asset.  The Greenspan put, as commonly discussed, is not a true option, just a sense that the Fed won't let the big guys fail.)  However, Merrill Lynch's eight billion dollar loss on mortgage-related securities suggests that if there's support for bad decisions from the Fed, it's not total, complete support.  Or else eight billion is not what it used to be.

Business planning conclusions:  The Fed is on top of things, with an eye to ensuring that businesses and consumers with good credit standing continue to have access to loans.  That means no recession, probably.

Bill Conerly Profile

I've been profiled on the Money-RX Blog, including a recent comment on the risk of recession.

Merrill Lynch Firing its CEO: Lessons for All Business

Looks like Merrill Lynch CEO Stan O'Neal is on his way out, as Merrill is taking an eight BILLION dollar write-off on mortgage-related securities.  Here's the most telling comment from the Wall Street Journal article:

Some former colleagues say Mr. O'Neal's talent and steely drive came with a tragic flaw: He didn't much engage in debate, kept his own counsel and had little use for the kind of strong-willed subordinates who might have helped him steer clear of the subprime troubles that brought him down. In the early years of his tenure, which began in 2002, Mr. O'Neal purged the firm of many of its longtime senior employees and later fired some of those considered his allies.

"He was uncomfortable around independent people [with] views which might be different than his, and whose loyalty was to the firm rather than to him personally," said Barry Friedberg, Merrill's longtime head of investment banking in the 1980s and 1990s. Mr. Friedberg retired in 2003, after he tried unsuccessfully to offer Mr. O'Neal advice.

A while back I quoted Gary Loveman, CEO of Harrah's:

"... all organizations seek to please the leader, so there is constant pressure to give my otherwise lame and ill-considered view far more gravitas than they deserve."

The moral is simple.  If you want to avoid $8 billion write-offs and being sacked, make sure someone in your organization is willing to tell you that you're wrong.  If you are a board member, don't hire a CEO who won't listen to differing opinions.

Subprime Mortgage Crisis: A Horror Story

If the Halloween season has whetted your taste for horror stories, why not go for something scarier than a chain saw massacre or a boy with scissor fingers?  Go for a subprime mortgage crisis.  Fortune Magazine has one for you called "House of Junk."

Fortune asked around regarding which pool of mortgages really, really stinks.  They found one of the worst, then delved deeply into it.  With the name of that obscure pool (GSAMP Trust 2006-S3), you can even go to Edgar and see the actual filings on which Fortune based its article.  The prospectus makes interesting reading, in a macabre sort of way.

If you are not familiar with how the mortgage industry slices and dices individual mortgages into Wall Street securities, this article will make fascinating reading.  But don't blame me if you have nightmares.

Gum Marketing We Can All Chew On

Ben Pratt over at Market-Based Management Institute has a great post on his blog about selling chewing gum in Poland. Here's an excerpt:

He said that several years ago the Polish division of Wrigley ... had somewhere on the order of 70% market share of chewing gum sales in that country, almost none of it was the sugar-free variety.

Part of their sales and operations planning process was to document assumptions and revisit them at each planning cycle.  One of the assumptions they documented was that as people grew older their preference would shift from sugar-based products to sugar-free products, and demographics suggested that the population was aging.  At some point in the future they decided they'd have to change their mix of sugar / sugar-free products, but that time would be many years in the future.

Charles Koch's Science of Success quotes George Will as saying, "the future has a way of showing up unannounced."  And it seems to show up a lot faster than we expect.

Wrigley began seeing small but meaningful deviations to their expected sugar-free gum sales numbers.  Because they were revisiting their assumptions each month, they got curious and began testing whether the sugar-to-sugar-free preference shift was really as far out as it they'd assumed.  The result of their analysis caused them to recognize an opportunity: people in Poland were looking for sugar-free products, but not many companies were supplying them.

This information caused them to re-think their strategy and they immediately shifted their product mix almost entirely to sugar-free gum.  They captured 90%-plus of the market.

I'm guessing that without a formal sales forecast as a benchmark, the company might not have caught the shift in trend.  A minor product grows a little faster than expected; ho hum.  But the trial-and-error economy demands that you watch for the little things that are growing faster than expected.  Then be ready to nurture them into really big things.

Middle Class Jobs Declining? Maybe Not

Are middle class jobs on the decline?  Stephen Rose has an interesting article in the Wall Street Journal on the subject.  Imagine a day when relatively few women worked, and when they did, they earned less than men earned.  Now change women's attitudes so that they are more eager to enter the work force, or change employers' attitudes so that they are more willing to hire women.  What happens to average wages?  Well, wage per worker may go down, as the new women bring down the average.  That could happen even if the wage gap is narrowing, and even if women are gaining wages, and men are also gaining wages.

Stephen Rose goes into the subject of middle class jobs by looking separately at men and women, and by level of education.  His key finding won't fit the spin from either party's econo-hacks:

"For three-quarters of the workforce (women and the top half of male earners), economic growth translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education."

There was a day when high wage jobs were available to low skilled people.  Those days are over.  Gone.  Done.  Sorry.  It was fun while it lasted, but it is no more.  Technology changed it.  Trade changed it.  But there's no going back.  Both national-level politicians and local chamber of commerce boosters seem ignorant of this fact, as they try to "create jobs" or "bring in an elephant" employer.  Here's the new bottom line: high skilled people will find work at high wages, and low skilled people will find work at low wages.

The Value of an Economics Major

"Is economics a good major?" is how students phrase the questions.  "What can you do with an economics major?" is how parents ask it.

First, personal interest and ability play a big role.  It's a lot easier to major in economics if you love the subject.  I fell in love with it when I was 16 and then just rolled along.  My friend John Goodman, now head of the National Center for Policy Analysis, says that economics were the easiest courses he took.  That's a good indicator that you have native talent.

But let's get practical.  First, economics is a way of thinking that will be tremendously valuable in management positions in business, government, or non-profits.  Entrepreneurs, too, will benefit from thinking this way.

Even better, economics is hard.  If it's easy, just take more advanced courses.  It will get hard.  (If it doesn't get hard, that's an indication that you could consider getting a Ph.D.  More on that below.) It's important to take challenging course work if you ever want to do challenging work after college.  You need to stretch yourself.  I'd much rather see a student who stretched, than one with a 4.0 average in easy courses.

Best of all, economics may help you understand how to push numbers around.  Notice that I said "may."  If you take courses with multiple choice questions, you won't learn this.  But if you are assigned good projects that require quantitative analysis, you'll learn what you need to learn.  I'm not even talking high-powered econometrics.  (Some econometrics can set you back, as you focus on the nuances of estimation rather than what the data are saying.)  Try your hand at a project where you need to find some data, correct it for something (like size of the country or seasonality or average weight of pigs in the county), and form a conclusion.  That's a great value.

If your college has a thesis option, sometimes required to graduate with honors, take it.  You'll curse the thesis.  (I did.)  You'll wish you had chosen the easier path of simply taking courses.  But the experience will be very good.  Talk about it in your first job interview.  Go in to the interview with the thesis in mind, ready to explain what you learned regarding getting organized, getting projects done, tracking down data, and meeting the disparate demands of the different members of your thesis committee.  That will sound to the interviewer just like real work.

Better yet, in your first job you'll have a better handle on how to deal with the new problems.  And if you're smart, you'll gravitate to the new problems.  The old problems have been solved.  Sure, corporations will hire college grads to implement the solutions to old problems.  But the challenge--and big rewards--come from solving the new problems.

Should you go to grad school in economics?  In most cases the answer is no.  If you're not sure what to do after graduation, DO NOT go to graduate school.  Get a job.  Any job.  In fact, if you think your only job option is to sell clothes at The Gap, then do that.  If you learned anything in college, you'll be managing the store in a couple of years.  You may not want to stay in your first job, but it will help you learn what sorts of work you like and would be good at.

When should someone go to grad school?  When you absolutely refuse to be talked out of it.  When you aren't listening to arguments about how many years it will take, how low the pay will be afterwards, how much BS you'll have to put up with.  When these don't make a difference to you because you simply have to learn all the economics you can possibly learn, OK, you're grad school material.

If you're still in college, here's an idea.  Find a school project that applies economics to a business area.  Develop a research methodology that requires you to interview business people.  (Examples: how companies find employees in areas of low unemployment; how transportation companies deal with high fuel prices; how banks consider the possibility of recession in evaluating business loan applicants.  Be creative and you'll think of lots more possibilities.)  Now, work the telephone.  Ask for interviews.  Business leaders are suckers for helping bright young students.  Ask good questions.  Listen carefully.    Wait until you're asked about your career plans to mention that you're trying to identify an industry or company with good career potential.  Write a thank you letter.  Send the people you interviewed a copy of your finished paper.  Call a month later to ask if they know anyone who's hiring.

Economics is a great major, but don't think that you will spend your life as an economist.  In 99% of the cases, you won't.  But the undergraduate economics major is a great tool for making better decisions throughout your career.

Career Advice: What Smart Young People Need to Know

Got a bright young person in the family?  If so, steer him or her to Marc Andreessen's blog, where he has a series of posts with career advice.  Start here, then go here, and then here.

Looking back on my own career, which I've conducted without the benefit of Marc's advice, I've been at my best when I was (inadvertently) following his guidelines.  One of my sons turned me on to Marc's blog, and I'm forwarding the link to the other son.  Highly recommended.

Global Economy Strong, Forecast Almost As Good

A good way to keep up with the world economy is to check out the International Monetary Fund's, World Economic Outlook, which comes out twice a year.  Here's what I learned:

Of the 30 developed countries, all had positive year-over-year growth from 2004 through 2007.  Of the emerging/developing countries, 138 out of 151 had positive growth for a four-year string.  (The 2007 figures are half-forecasts, of course.)

I went back to some old data, which goes back to 1970.  I could not find a comparably strong four-year period.  In fact, there were very few single years with such consistent growth, much less a string of four growth years.

Two things are going on here.  First, the rate of growth for the emerging countries has accelerated.

The second thing going on is the Great Moderation, which is a calming of the frequency and severity of recessions around the world.  (You can learn a lot about this is my short interview with Mark Thoma on the Businomics Audio Magazine.)

Will there be recessions in key countries of the world?  No doubt there will be.  But economic conditions around the world look better than I've ever seen them.